First Solar: European Market Is A Mess, Q1 Sales Flat

Changes in solar incentives in key markets such as Germany and Italy are making life difficult for major players such as First Solar, which reported a flat first-quarter revenue and lower earnings on Tuesday afternoon.

“With a lot of pending changes, the market started out really slow in 2011,” said Rob Gillette, First Solar’s CEO, during a conference call with analysts. “We expect the European industry demand to go through a period of adjustment in the second and third quarter.” Manufactures saw solar panel prices falling faster than expected, Gillette said, and the lower selling prices were partly responsible for the company’s financial results.

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Arizona-based First Solar posted $567.29 million in sales for the first quarter, down only slightly from $567.96 million from the year-ago quarter. It reported $115.97 million in net income, or $1.33 per share, down from $172.35 million, or $2 per share, from the first quarter of 2010.

First Solar’s production cost didn’t budge from quarter to quarter and remained at 75 cents per watt. The efficiency of the solar panels to convert sunlight to electricity improved from 11.6 percent to 11.7 percent.

Europe is the largest solar market, a result of a type of incentive policy that requires utilities to buy solar electricity at government-set, premium prices. The prices are supposed to fall over time as the market grows and production costs drop, but political leaders in Europe in recent years have taken to making extra cuts to curb explosive growth and minimize the impact on consumers, who help to pay for these incentives through their electric bills.

Germany is carrying out planned cuts to its solar incentives this year, and the country’s solar energy trade group said the amount of installations will likely to be lower for 2011 than last year, Reuters reported Tuesday. Meanwhile, Italy, which shot up to become among the hottest solar market in recent years, is now wrestling over how to put its solar incentive program on diet. The latest version of the proposed cuts, reported by Reuters Tuesday as well, showed a significant spending reduction of up to 33 percent.

France also has trim incentives for large projects, a decision that followed a three-month suspension of the program earlier this year. First Solar has suspended its plan to build a factory in France.

“The new (incentive policy) doesn’t provide sufficient multiyear visibility for a sizable PV market,” Gillette said. “The government failed to take into account the need of investors. “

Although First Solar and its competitors knew incentives were set to drop, they couldn’t predict how low the numbers would go. That made it tough to them to determine demand, particularly for a company like First Solar that runs a large fleet of factories. The company has talked about efforts to enter new markets in the past few quarters.

First Solar also is targeting the small commercial rooftop market where project sizes range from 10KW to 30KW. In the past the company’s solar panels have been used by its customers mostly for projects at 30KW and above, partly because they are not as efficient at sunlight-to-electricity conversion as the more widely used silicon solar panels. Efficient solar panels are desirable when you want to pack a certain generation capacity into a limited space.

The company has become a major solar power plant developer in North America as a way to hedge against fluctuating demand for its solar panels in Europe. First Solar plans to build at least 450MW of projects in 2011. One of its star projects, the 290MW Agua Caliente in Arizona, has been delayed because of its negotiation with the U.S. Department of Energy over a $978 million loan guarantee. The company now expects to close that loan guarantee later this quarter or in early third quarter. First Solar also is applying for loan guarantees for three other projects.

Gillette avoided answering directly a question about how the pending sale of a majority stake in SunPower to French oil giant Total would affect First Solar’s ability to compete. Total is promising to provide $1 billion in credit over five years for SunPower’s power plant development business. He did say the deal “a little bit of a surprise,” but that it reflects the growing number of energy giants to enter the solar market.

First Solar’s expectation for sales and earnings during 2011 hasn’t changed. It still anticipates generating $3.7-$3.8 billion in sales and post earnings of $9.25-$9.75 per share.